I have always found it fascinating how principles of investing are often so intertwined with various aspects of sports, not just one specific sport, but across many. Before diving deeper into this connection, let me set the context.
Recently, I was watching the highlights from the Border-Gavaskar series, and the commentators discussed how Virat Kohli often gets out to balls pitched wide outside the off-stump, resulting in edges – something he could likely avoid by choosing not to play at them. The commentator pointed out that this had become a recurring issue and suggested that Kohli should work on correcting this flaw, as opponents were capitalizing on it. I thought about this for a while. Here is a batsman considered one of the best ever in cricket, yet falling prey to the same “off-side trap” over and over again. Interestingly, a similar issue was faced by Novak Djokovic at one point in his career, where despite his superior physical and technical skills, he struggled with consistency and mental toughness. Now, think about it – both players are among the greatest of their generation. They don’t necessarily need a coach for technical skills, yet they both have support staff focused on conditioning their mental toughness—people who help them bounce back from setbacks, refine their vision, and improve their game beyond physical aspects.
Now, how is this related to investing, you might wonder? Well, there’s a phrase I came across early in my investing journey that stuck with me: “Investing is a combination of art and science.” Initially, I didn’t fully grasp it, but now it makes sense. The “science” part is easier to understand – it’s about learning how to read financial statements, analysing profit and loss, understanding ratios, and assessing macro and microeconomic factors. With experience, you get better at interpreting these data points. But the real magic lies in the “art” of investing. Art is about seeing the big picture, connecting the dots, and recognizing trends that aren’t immediately obvious from the numbers. It’s something that develops over time with experience and humility. And a key part of this art is managing biases. Every investor, from Warren Buffett to the average Joe, has at some point fallen victim to biases, me included. Being aware of these biases can help us make more informed decisions.
So why are we discussing this now? In today’s market, especially with volatility increasing across sectors, it’s more crucial than ever to recognize and manage biases. While broader indices may not have corrected significantly, several underlying stocks have experienced sharp declines. In this environment, understanding your biases is critical.
Three common biases to be aware of while investing:
- Confirmation bias: We often seek information that confirms what we already believe, ignoring contradictory evidence. This “echo chamber” can reinforce poor decisions and prevent us from recognizing emerging trends or risks. For example, when the iPhone was first launched, companies like Nokia and Blackberry dismissed it, assuming their market dominance was untouchable. A decade later, Apple had reshaped the entire smartphone industry, leaving these companies in the dust.
- Overconfidence bias: This is a common trap for investors. Many overestimate their knowledge and abilities, which leads to excessive risk-taking and underestimating potential downsides. A clear example is the 2021 market rally, where many new investors and influencers, buoyed by liquidity, believed they had mastered investing—leading to a surge in risky behaviour and speculative trading.
- Herd mentality: Investors often follow the herd, particularly during periods of market booms or crashes. The fear of missing out (FOMO) can drive people to invest in trends without fully grasping the risks, as seen with the recent surge in cryptocurrency investments, despite many investors lacking a clear understanding of the potential dangers. A similar pattern emerged after the COVID-19 pandemic, when money flowed into sectors and stocks that had already experienced significant gains. Industries like technology, healthcare, specialty chemicals, and PSUs saw substantial returns, prompting investors to chase these gains, often overlooking the fact that some of these sectors had previously underperformed. Those who entered these stocks at the peak, driven by past performance, and those following the trend are likely to face disappointment.
Knowing about these biases is important, but it’s not enough. To manage them effectively, you need a strategy:
- Adhere to asset allocation and diversification: Asset allocation often plays a more significant role in long-term returns than individual security selection. Investors should align their portfolios with their risk profiles and avoid making frequent adjustments based on market volatility. Diversifying across different asset classes helps reduce the risk of being biased toward a single investment type.
- Avoid decisions based on rumours or hot tips: Always base your investment decisions on solid research and analysis. Look at fundamentals like earnings, growth potential, and financial health. Combat confirmation bias by actively seeking information that challenges your views.
- Review and rebalance your portfolio regularly: A portfolio should be examined with a rational, unbiased approach to assess what’s working and what isn’t. It’s important to be patient – investing is not about quick gains, and some assets (like venture capital or private equity funds) are designed to offer non-linear returns over time.
Markets will always be unpredictable, and short-term fluctuations are inevitable. Accepting this uncertainty helps you avoid impulsive reactions. Seasoned investors use systems and frameworks to manage their biases, often exchanging ideas within their teams to uncover blind spots.
Now, how does this relate to Novak Djokovic and Virat Kohli you might wonder? Both have trained their minds (the “art”) to bounce back from setbacks, while their technical skills (the “science”) have propelled them to the top. Djokovic, with the help of his mental conditioning, surpassed Roger Federer’s record for the most number of Grand Slam singles matches played in the Australian Open. Meanwhile, Kohli’s 50 off 55 balls helped India clinch a 3-0 series victory against England. Just like in investing, perhaps sports too is a combination of art and science.
